“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Urban[ism] Legend: The Free Market Can’t Provide Affordable Housing

“Relaxing” zoning won’t do the trick in a city where prices are high enough to justify skyscrapers with four to ten times the density currently allowed

Over at Greater Greater Washington, Ms. Cheryl Cort attempts to temper expectations of what she calls the “libertarian view (a more right-leaning view in our region)” on affordable housing. It is certainly reassuring to see the cosmopolitan left and the pro-market right begin to warm to the benefits of liberalization of land-use. Land-use is one area the “right,” in it’s fear of change, has failed to embrace a widespread pro-market stance. Meanwhile, many urban-dwellers who consider themselves on the “left” unknowingly display an anti-outsider mentality typically attributed to the right’s stance on immigration. Unfortunately, in failing to grasp the enormity of the bipartisan-caused distortion of the housing market, Ms. Cort resigns to advocate solutions that fail to deliver widespread housing affordability.

Yes, adding more housing must absolutely be a part of the strategy to make housing more affordable. And zoning changes to allow people to build taller and more usable space near transit, rent out carriage houses, and avoid expensive and often-unnecessary parking are all steps in the right direction. But some proponents go on to say relaxing zoning will solve the problem all on its own. It won’t.

Well, if “relaxing” zoning is the solution at hand, she may be right – relaxing will only help a tad… While keenly aware of the high prices many are willing to pay, Cort does not seem to grasp the incredible degree to which development is inhibited by zoning. “Relaxing” won’t do the trick in a city where prices are high enough to justify skyscrapers with four to ten times the density currently allowed. When considering a supply cap that only allows a fraction of what the market demands, one can not reasonably conclude “Unlimited FAR” (building density) would merely result in a bit more development here and there. A radically liberalized land-use regime would deliver numbers of units several times what is permitted under current regulation.

Ms. Cort correctly concludes that because of today’s construction costs, new construction would not provide housing at prices affordable to low income people. This will certainly be the case in the most expensive areas where developers would be allowed to meet market demands by building 60 story skyscrapers. Advocates of land-use liberalization who understand the costs of construction would not claim that dense new construction will house the poor. But if enough supply is allowed to come to market today, today’s new construction will become tomorrow’s affordable housing. And this brings us to the more meaningful discussion: filtering. Here’s where Ms. Cort’s analysis completely falls apart.

It is true that increasing supply eases upward pressure on all prices. But the reservoir of naturally cheaper, older buildings runs out after a while.

Tragically, Ms. Cort is using the current radically supply-constrained paradigm to analyze a free-market counter-factual. If development at levels several times the current rate were allowed over the past few cycles, the reservoir of cheaper, older buildings would have remained plentiful and affordable. If the market were allowed to meet demand for high-end units in the form of dense new construction, there would be little or no market pressure for unsubsidized market-rate units to be converted into luxury units. The 1400 Block of W Street NW example she gives would almost certainly still be affordable.

On a larger scale, the increased supply of housing in the area helps absorb demand for more housing, but it’s not enough to stem the demand for such a sought-after location. Between 2005 and 2011, the rental housing market’s growth added more than 12,500 units. But at the same time, $800/month apartments fell by half, while $1000/month rentals nearly doubled. Strong market demand will shrink the availability of low-priced units. That’s what has happened over the last decade as DC transformed from a declining city into a rapidly growing one.

But, 12,500 units is the amount of supply added under the current over-regulated regime. This amount of development is minuscule in a large city. (see diagram below) What if DC allowed as much supply growth as Austin or Miami? The 12,500 figure would triple. Further, since Austin and Miami are far from free-market, the development rate in a truly free-market DC would certainly exceed a tripling. If you consider the amount of supply that would have been added over the last several decades in an unlimited FAR DC, Ms. Cort’s position starts to sound quaint. Conservatively assuming 50-100,000 units of rental housing would have been developed over the last few decades of DC’s growth, rents certainly would not have doubled. I’ll go out on a limb and estimate that average rent growth would be close to inflation.

Chart by the Citizens Budget Commission (via NYYIMBY)

Ms. Cort wants housing to be less than 30% of gross income for nearly all residents. Will the market provide new housing affordable to minimum wage earners at the most expensive intersection in Georgetown? Probably not, and I hope she isn’t setting the bar that high. While nobody is wise enough to know whether a free-market in land use would accomplish this, a free-market DC could be affordable to 50-100,000 more people than the zoned-to-death DC of today. Will stock of units deemed affordable to low wage earners be of the quality, location, and size acceptable to Cort? The necessity for further intervention is a subjective preference.

Wrong. Supply really must be part of the whole story. A city is only affordable to the number of residents it houses affordably.

Failure to recognize this only shifts the burden from one demographic to another. (and it won’t be the rich who pays the price) If a zoning-plagued city fails to provide 1,000 units demanded, 1,000 people can no longer afford to live there. Even if that city chose to subsidize housing for 2,000 people at 50-80% of AMI, that doesn’t change the fact that 1,000 people who wanted to live in that city must leave. Any viable solution (free-market or otherwise) must involve increasing supply significantly, either through creating supply directly or subsidizing demand through vouchers, which induces new development. But, this simply can’t happen if overall supply is capped through zoning.

About Adam Hengels

Adam is passionate about urbanism, and founded this site in 2007, after realizing that classical liberals and urbanists actually share many objectives, despite being at odds in many spheres of the intellectual discussion. His mission is to improve the urban experience, and overcome obstacles that prevent aspiring city dwellers from living where they want. http://www.marketurbanism.com/adam-hengels/

Comments

You could easily solve a lot of the problem without even needing to build anything new. Make it easier for people to rent out spare rooms or basements in their houses. I’m sure there are people who are fine paying $500/month for a small basement room to live in DC. They do it in Manhattan with their closet apartments. Also getting rid of the rules of the number of people who can live in a house. Rowhouses can easily fit 10-12 people and I’m sure there is demand for that kind of housing.

Good post. Fully agree that the free market would create affordable housing for all the reasons you mention, but it is not only a question of how much affordable housing is created. It is also a question of where it is created.

When a city becomes socioeconomically segregated, it causes big societal problems. How would the free market prevent all of the new affordable supply from being clustered together?

1. An unlimited FAR DC is a fantasy. At some level higher FARs DO impose unreasonable impacts on neighborhood charecter (even a stopped NIMBY Is right 2X a day) and even were that not the case, the politics would still be impossible
2. Even if you could build unlimited housing, and were willing to wait till it ages down (aging housing is at best a long term solution) it is not clear that the lowest income households could afford the maintenance costs (assuming post “how the other half live” housing codes) on high density housing (which is costlier to maintain, per sq ft, than in a trailer park, IIUC)

Ms Cort leaned perhaps a tad too far from market solutions (because she neglected some of the impact of aging housing, not on the poor, but on the middle class) , but her basic approach, that market liberalization solutions cannot be the only tool, was essentially correct, practically, and especially politically.

I understand the supply-demand issue and that zoning prevents the free market to provide appropriate levels of affrd housing. One of my issues with this though is that if we were to abolish zoning and built up all of this supply, would we have the necessary infrastructure in place to meet the demands of this new stock? I am not familiar with this D.C. case, but where I study in Toronto, there are some neighbourhoods (i.e. Liberty Village – development friendly local govn’t provided incentives in the past to build up the area) where an incessant amount of high rise residential condos were built, and although the pricing is pretty cheap (compared to rest of downtown T.O.) because of this increased stock, there are huge gaps in the infrastructure that should be in place to support these developments. For example, in Lib. Village there is a tremendous lack of public transit. And for the thousands of units sharing two city blocks there is only one 2 lane street running through the neighbourhood.

So what are the results of that? Annoying traffic? In some sense, it’s the deficiencies of a place that may make it affordable, and making sure that all the infrastructure is *just so* before you build housing seems like it would a) slow down or stop the creation of housing and b) make it more expensive. I don’t know anything about Toronto, but if there was a nicely located place which was cheap because of poor transit and narrow roads, I might jump at the chance, because I like to travel on bike, and don’t mind walking. Different people have different needs, and trying to design everything to be one-size-fits-all is not a great way to make it affordable.